Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals

We study capital structure negotiation and cost of debt financing between sponsors and lenders using a sample of more than 1,000 project finance loans worth around US$195 billion closed between 1998 and 2003. We find that lenders: (i) rely on the network of nonfinancial contracts as a mechanism to control agency costs and project risks, (ii) are reluctant to price credit more cheaply if sponsors are involved as project counterparties in the relevant contracts, and finally (iii) do not appreciate sponsor involvement as a contractual counterparty of the special purpose vehicle when determining the level of leverage.     

Inflation Targeting,Recursive Inattentiveness,and Heterogeneous Beliefs

We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine‐tuned to correct agents' biased beliefs.     

Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets

The paper focuses on two countries, Japan and the U.S., to test the integration of capital markets. In Japan, the enactment of the Foreign Exchange and Foreign Trade Control Law in December of 1980 amounted to a true regime switch that virtually eliminated capital controls. Using multifactor asset pricing models, we show that the price of risk in the U.S. and Japanese stock markets was different before, but not after, the liberalization. This evidence supports the view that governments are the source of international capital market segmentation.     

Money Market Integration

We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds–Eurodollar spreads to provide evidence of strong integration of the U.S. markets for federal funds and Eurodollars, the two core components of the dollar money market. Our evidence of negligible federal funds–Eurodollar premia contrasts with previous findings of large and predictable premia, which have been interpreted as evidence of segmentation between the markets for federal funds and Eurodollars. Our results, however, are consistent with possible persistent segmentation within the global Eurodollar market. We document several patterns in the behavior of federal funds–Eurodollar spreads, including liquidity effects from trading volume to yield spreads' volatility.     

Determinants of Regular and Occasional Consumers' Intentions to Buy Organic Food

This study analyzes the impact of ethical motivations, food safety and health‐related concerns on purchasing intentions of habitual and less frequent consumers of organic food. A sample of 291 subjects was surveyed through a paper‐and‐pencil questionnaire and classified either as “regular” or “occasional” purchasers of organic food according to their buying frequency. Results show different determinants of intention for the two groups of subjects: ethical motivations affect the purchase intentions of regular consumers, whereas food safety concerns influence the purchase intentions of occasional consumers. Implications are discussed.     

LEGAL INSTITUTIONS,INNOVATION, AND GROWTH

We analyze the relationship between legal institutions, innovation, and growth. We compare a rigid legal system (the law is set before the technological innovation) and a flexible one (the law is set after observing the new technology). The flexible system dominates in terms of welfare, amount of innovation, and output growth at intermediate stages of technological development—periods when legal change is needed. The rigid system is preferable at early stages of technological development, when commitment problems are severe. For mature technologies, the two legal systems are equivalent. We find that rigid legal systems may induce excessive R&D investment.     

Scholarships or Student Loans? Subsidizing Higher Education in the Presence of Moral Hazard

An income-contingent loan scheme can at best replicate the allocation brought about by a scholarship scheme financed by a graduate tax, and only on condition that there is nothing to stop the policy maker from using tuition fees as if they were taxes. If that is not possible, even the best loan scheme will exclude some well-qualified school leaver from university. Even if individual study effort is observable, but more so if it is not, it is not socially desirable that all students should specialize in the subjects that promise the highest graduate earnings.     

Transparency and Economic Policy

We provide a two period model of political competition in which voters imperfectly observe the electoral promises made to other voters. Imperfect observability generates an incentive for candidates to offer excessive transfers even if voters are homogeneous and taxation is distortionary. Government spending is larger than in a world of perfect observability. Transfers are partly financed through government debt, and the size of the debt is higher in less transparent political systems. The model provides an explanation of fiscal churning; it also predicts that groups whose transfers are less visible to others receive higher transfers, and that imperfect transparency of transfers may lead to underprovision of public goods. From the policy perspective, the main novelty of our analysis is a separate evaluation of the transparency of spending and the transparency of revenues. We show that the transparency of the political system does not unambiguously improve efficiency: transparency of spending is beneficial, but transparency of revenues can be counterproductive because it endogenously leads to increased wasteful spending.